Kadant Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2025

Key Takeaways

  • Positive Sentiment: Bookings increased 7% year-over-year to $269 million, driven by strong capital orders and stable aftermarket demand.
  • Positive Sentiment: Gross margin improved 150 basis points to 45.9%, reflecting a higher aftermarket mix and operational efficiencies.
  • Positive Sentiment: Operating cash flow rose 44% and free cash flow increased 58% year-over-year, supported by higher customer deposits on capital bookings.
  • Negative Sentiment: The timing and certainty of capital orders remain volatile due to evolving U.S. trade policies and increased tariffs on steel and China-sourced products.
  • Neutral Sentiment: The company ended Q2 with a backlog of $299 million (up 16% year-over-year) and reiterated full-year 2025 guidance of $1.02–1.04 billion in revenue and $9.05–9.25 in adjusted EPS.
AI Generated. May Contain Errors.
Earnings Conference Call
Kadant Q2 2025
00:00 / 00:00

There are 7 speakers on the call.

Speaker 3

Good day and thank you for standing by. Welcome to the second quarter 2025 Kadant Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Operator

Thank you.

Speaker 5

Good morning everyone and welcome to.

Speaker 5

Kadant second quarter 2025 earnings call. With me on the call today is Jeffrey L. Powell, our President and Chief Executive Officer. Before we begin, let me read our Safe Harbor Statement. Various remarks that we may make today about Kadant's future plans and expectations, financial and operating results, and prospects are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 28, 2024, and subsequent filings with the Securities and Exchange Commission.

Speaker 5

In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. During this webcast, we refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our second quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the Investor section of our website at kadant.com.

Speaker 5

Finally, I want to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we're referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeffrey Powell, who will give you an update on Kadant's business and future prospects. Following Jeffrey's remarks, I'll give an overview of our financial results for the quarter and we will then have a Q and A session. Jeff, thanks. Mike, hello everyone.

Operator

Thank you for joining us this morning to review our second quarter results and discuss our business outlook for the second half of 2025. I'll begin by reviewing our operational highlights. I'm pleased to report that we had solid demand for aftermarket parts and a healthy increase in capital equipment orders during the second quarter. Overall market demand, particularly in North America, was near a historical high in the second quarter across all our operating segments, and our commercial teams did an excellent job at winning new business in a challenging environment. This performance against a backdrop of continued trade policy uncertainty and global trade tension is noteworthy, and I want to congratulate our management teams around the globe on their strong performance. Our operations continue to focus on meeting our customers' needs and implementing process improvements to increase productivity.

Operator

As we will discuss this morning, our strong gross margin performance in the quarter is a result of these efforts. Turning next to Slide 6, I'd like to review our Q2 financial performance. Bookings in the second quarter increased 7% to $269 million, led by strong capital performance and stable demand for aftermarket parts. The capital project bookings were particularly encouraging to see as the economic environment remains at a high level of uncertainty. Revenue decreased 7% compared to the record revenue achieved in the second quarter of 2024. This decline was largely the result of softer capital orders in the back half of 2024, which led to fewer capital shipments in the first half of this year. Based on our high level of project activity, we expect sequential improvements in the coming quarters. Adjusted EBITDA was $52 million, down 15% from the then record in the prior year period.

Operator

Our adjusted EPS was $2.31, down 18% compared to the second quarter of 2024. We have a growing backlog and expect strong bookings in the second half of 2025. Capital project activity remains good, but I want to note that the timing of these orders is less certain. This uncertainty is amplified by evolving U.S. trade policies in the ever-changing tariff environment. I'll provide more details on that when I review operating segments. I'll begin with our Flow Control segment. As you can see in Slide 7, our Flow Control segment had solid bookings in the second quarter of 2025. We benefited from strong aftermarket demand while capital project activity was softer compared to the prior year period. Revenue in the second quarter increased 4% to $96 million, even as weaker manufacturing activity in Europe and China dampened our results.

Operator

Our aftermarket revenue remained strong in the second quarter and made up 75% of total revenue. Solid operating performance led to an adjusted EBITDA margin of 28.9%. As we look ahead to the second half of 2025, we expect demand to improve as the year progresses. That said, the frequently changing global trade discussions and tariff targets may impact capital investment activity. Before leaving this segment, I wanted to share that the integration of Dynamic Sealing Technologies, which was acquired in June of 2024, is now complete and we are pleased to have this leading producer of fluid rotary unions and related flow control products fully integrated into Kadant. The diversity they bring to Kadant in terms of new markets and access to new customer segments greatly expands our opportunities as we pursue growth within our Flow Control operating segment.

Operator

In our Industrial Processing segment, new order activity was up 9% compared to the same period last year to $105 million. This booking performance was led by a significant increase in capital orders for our wood processing equipment from three North American producers of engineered wood products. Revenue decreased 16% compared to the record revenue achieved in the second quarter of 2024. This decline was due entirely to weaker capital shipments as our aftermarket parts business was up 7% compared to the second.

Speaker 5

Quarter of last year.

Operator

Adjusted EBITDA and adjusted EBITDA margin declined due to lower revenue volume and the lack of operating leverage. Looking ahead to the second half of 2025, we expect capital project activity to strengthen in this segment, particularly within our fiber processing product line where a number of large capital projects are in the pipeline. Turning now to our Material Handling segment, we had excellent bookings performance in Q2, $71 million. The 16% increase over the prior year period was led by our bulk material handling product line, and we had solid growth from our baler product line. As was the case with our other two operating segments, weaker capital shipments were the primary contributor to a 6% decline in revenue in the second quarter. Business activity remained high with a number of larger capital projects under discussion, although the timing can be uncertain as to when these projects are executed.

Operator

As I conclude my prepared remarks, I want to emphasize how pleased I am with our operations teams as they continue to execute their strategic initiatives to create and capture more value. Looking ahead to the second half of 2025, we believe industrial demand will strengthen relative to the first half of the year, especially once the global trade issues get worked out. Our backlog is improving, and we are well positioned to capitalize on new opportunities that may emerge as the era unfolds due to our ability to generate strong cash flows. I am pleased to announce that shortly after the close of the quarter, we acquired Babini, a small company in Italy that manufactures dewatering equipment for the food and paper industry. We were a licensee for their technology for our upcycling business, and we are excited to have them join the Kadant family.

Operator

I'll now turn the call back over to Mike for a review of our financial performance in Q2 and our guidance outlook for the remainder of the year.

Speaker 5

Mike, thank you, Jeff. I'll start with some key financial metrics from our second quarter. Our second quarter revenue was $255.3 million, included record aftermarket parts revenue of $181.8 million. Gross margin was 45.9% in the second quarter 2025, up 150 basis points compared to 44.4% in the second quarter 2024. Despite the impact from incremental tariffs, our gross margin was close to 46% for the second quarter in a row. This increase is primarily associated with a higher overall percentage of aftermarket parts, which represented 71% in 2Q25 compared to 63% in the prior year. SG&A expenses as a percentage of revenue increased to 29% in the second quarter 2025 compared to 25.5% in the prior year period. SG&A expenses increased $3.9 million or 6% to $73.9 million in the second quarter 2025 compared to $70 million in the second quarter 2024. The weakening of the U.S.

Speaker 5

dollar resulted in a $1.9 million increase in SG&A expenses, including a $1.2 million impact resulting from the change from foreign currency gains in the prior period to losses in the current period and a $0.7 million unfavorable effect of foreign currency translation. In addition, we had incremental SG&A expense of $1.8 million related to our acquisitions. Our GAAP EPS decreased 17% to $2.22 in the second quarter and our adjusted EPS decreased 18% to $2.31 in 2Q25. Adjusted EPS exceeded the high end of our guidance range by $0.31 due to higher revenue and better gross margin than forecast. The higher revenue in the second quarter was driven by our record aftermarket parts revenue. All of our segments had higher than expected gross margin due to the mix of aftermarket parts in the period.

Speaker 5

In addition to the revenue beat and gross margin performance, we had strong cash flow performance in the quarter, which I'll discuss in further detail on the next slide. Adjusted EBITDA decreased 15% to $52.4 million compared to $61.8 million in 2Q24 due to lower capital revenue at our Industrial Processing segment, which led to reduced EBITDA performance as a percentage of revenue. Adjusted EBITDA was 20.5% compared to 22.5% in 2Q24. As outlined in the chart, our cash flow increased significantly compared to both 1Q25 and the prior year period. Operating cash flow increased 44% to $40.5 million in 2Q25 compared to $28.1 million in 2Q24. Free cash flow increased 58% to $36.5 million in 2Q25 compared to $23.1 million in the second quarter. This strong performance was driven in part by an increase in customer deposits associated with capital bookings in the quarter.

Speaker 5

Non-operating uses of cash in 2Q25 included $34 million of repayments on our debt, $4 million for capital expenditures, and $4 million for dividends on our common stock. Let me turn next to our EPS results for the quarter. Our adjusted EPS decreased $0.50 from $2.81 in 2Q24 to $2.31 in 2Q25. This included decreases of $0.56 due to lower revenue, $0.26 from higher operating expenses, $0.02 due to higher non-controlling interest expense, and $0.01 due to higher weighted average shares outstanding. These decreases were partially offset by increases of $0.21 due to a higher gross margin percentage, $0.12 due to lower net interest expense, and $0.02 from a lower effective tax rate. There was no foreign currency translation effect on net income in the second quarter as the weakening of the U.S. dollar caused foreign currency exchange rates to more closely align with the prior period exchange rates.

Speaker 5

Looking at our liquidity metrics on slide 15, our cash conversion days, which we calculate by taking days in receivables plus days in inventory, subtracting days in accounts payable, decreased to 128 at the end of the second quarter 2025 compared to 130 at the end of the first quarter 2025. Working capital as a percentage of revenue was 17.7% in 2Q25 compared to 18% in the second quarter 2024. We continue to remain focused on paying down debt as efficiently as possible.

Speaker 5

Our net debt, i.e.

Speaker 5

Debt less cash was $151.7 million in the second quarter, decreasing $31 million sequentially and over $100 million compared to Q2 2024. Our leverage ratio, calculated in accordance with our credit agreement, decreased to 0.86 at the end of the second quarter 2025 compared to 0.95 at the end of the second quarter. At the end of the second quarter 2025, we had $162 million of bond available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity. Now I'll review our guidance for 2025. For the second quarter in a row, our book-to-bill ratio was over 1, and the strong bookings in the second quarter led to an ending backlog of $299 million, up 16% over the end of 2024. The majority of the large capital bookings relate to projects which we recognize as revenue in 2026.

Speaker 5

While there has been some clarity on country-specific tariffs, customers with large capital projects remain cautious as they evaluate how the tariffs will be applied and whether certain tariff costs can be mitigated. The estimated impact from incremental tariffs remains largely unchanged from our prior forecast. The most significant tariff impact to Kadant relates to tariffs on the imports of steel, which encouraged domestic suppliers to increase their prices, and on products sourced from our facilities in China. The Trump administration eliminated prior exemptions and applied a uniform 25% tariff on all U.S. steel imports in February and increased this tariff to 50% on June 4. We believe we'll be able to mitigate a large portion of the impact of the steel price increase by working with our suppliers and cost sharing with our customers.

Speaker 5

There was a reduction to the recently announced China tariffs from 145% to 30% effective in the middle of May. We will continue to pursue opportunities to reduce the impact of these costs by finding alternative suppliers, through cost sharing, and in some cases making investments to change our manufacturing capabilities and manufacturing components at different Kadant facilities. While there has been some clarification on certain tariffs, newly announced tariffs continue to create unease and resulting uncertainty in the market, which has impacted our customers' decision-making process. For our capital equipment, we have a very healthy level of quote activity, and we have seen little disruption to capital order activity related to maintenance and mission-critical equipment. However, if customers have flexibility with the timing for their equipment purchases, some are delaying placing the order until there is more certainty and stability in the markets they serve.

Speaker 5

This environment has made it extremely difficult for our operations to forecast the timing of capital orders, requiring significant judgment on order timing, revenue recognition, and future material costs. We will continue to monitor these tariff changes and will provide further updates as the year progresses and there is more clarity with new trade policies. We are maintaining our full year 2025 guidance. We continue to expect revenue of $1,020,000,000 to $1,040,000,000 in 2025 and adjusted EPS of $9.05 to $9.25, which excludes $0.16 of acquisition-related costs. Looking at our quarterly revenue and EPS performance in 2025, we expect that the second half of the year will be stronger than the first half. Our revenue guidance for the third quarter 2025 is $256,000,000 to $263,000,000. Our adjusted EPS guidance for the third quarter is $2.13 to $2.23, which excludes $0.01 of acquisition-related costs.

Speaker 5

We now anticipate gross margins for 2025 will be 44.8% to 45.3%. As a percentage of revenue, we now anticipate SG&A will be approximately 27.8% to 28.3% for 2025. We now anticipate slightly lower net interest expense of approximately $11,500,000 to $12,000,000. We continue to expect our recurring tax rate will be approximately 26% to 27%. That concludes my review of the financials and I will now turn the call back over to the operator for our Q&A session.

Speaker 3

Daniel, as a reminder to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q and A roster. Our first question comes from Ross Sparenblack with William Blair. Your line is open.

Speaker 5

Hey, good morning, guys.

Operator

Morning, Ross.

Operator

Just touching on the demand environment. Forgive me, but I believe you said you guys are expecting sequential order improvement from here.

Speaker 5

Yes.

Operator

Yep.

Operator

Parse out.

Speaker 5

Yeah, that's.

Speaker 5

You know, we're really talking first half versus back half, but we are looking at both a strong third and fourth quarter.

Speaker 5

Okay, we think we have closer to $90 million of equipment orders in the second quarter. Is that kind of the new run rate? We did have a benefit from the OSB of $18 million that was announced in May. It feels like run rate was roughly flat just from a demand perspective. When you talk to your customers, you get the sense that, you know, maybe the tariff uncertainty is invading and just the natural maintenance needs are finally catching up.

Speaker 5

I would say that it's, you know, as we talked earlier, Industrial Processing was the segment that we thought we'd have the strongest bookings growth in. Now we've seen some of that in wood processing, and we think that in the back half it won't be at the second quarter level, but it'll still be good on the capital side. Really where we anticipate strong activity is in the fiber processing product line. There are a number of large projects actually throughout the world that we have our eyes on.

Speaker 5

We hope that the customers will let those orders in the third and fourth quarter.

Speaker 5

Okay.

Speaker 5

On parts consumables, the recent strength there, do you believe that's been restocking? Is that still just the elevated age of the installed base, or is this kind of $180 million revenue sustainable on a quarterly basis going forward?

Speaker 5

Yeah, we think that it's really that, you know, it's due to the age of the installed base and that we're anticipating, although I'd say maybe a modest.

Speaker 5

Movement down because of the summer months.

Speaker 5

Here in the third quarter, very modest, but kind of continuing as we've seen.

Speaker 5

Okay, so capital equipment orders start to pick up and you guys deliver. What's the sensitivity we should expect to the parts receivables down mid single digits as the installed base, you know, catches up?

Speaker 5

As you're talking about when the equipment gets installed and what kind of impact that'll have, now you're out to 2026.

Operator

I would say that typically happens as the overall operating rates start to increase as the economy improves. We wouldn't expect to see any noticeable drop off in the aftermarket because the overall operating rates will increase as they get more confident, start to make the investments in the new equipment, and bring that online. It's normally because the economic conditions have improved, and we would expect operating rates to be up.

Operator

That's very helpful.

Operator

Thank you, guys. I'll jump back in queue.

Speaker 3

Thank you. Our next question comes from Gary Prestopino. Whitbarrington, your line is open. Good morning.

Speaker 3

Mike and Jeff, just want to get some numbers here. Mike, do you have what the current assets and current liabilities were at quarter end?

Speaker 5

Sure.

Operator

He's pulling out his trusty notebook, so just give him a second.

Operator

Okay.

Speaker 5

As an absolute, current assets were approximately $475 million, and current liabilities were approximately $200 million.

Speaker 5

Okay, thank you for that. Could I just get some more numbers surrounding the parts and consumables? It was in Flow Control. It was 75% this quarter versus what was it last year at this time?

Speaker 5

72.

Speaker 5

I'll just go through them, Gary. Flow Control $75 million this quarter, $72 million.

Speaker 5

Last year, Industrial Processing, 76% this quarter, 59% last year, and in Material Handling, 58% this quarter, 57% last year.

Speaker 5

Overall, as we mentioned, 71%.

Speaker 5

This year, this quarter, and 63% in the comparing quarter.

Speaker 5

Should we, given the fact that a lot more of the orders now are capital equipment, and you're going to start seeing that come into the mix when in 2026 really, or is it starting back half of the year?

Speaker 5

We are anticipating it to come for capital revenue to pick up in the back half of the year. As I just was mentioning to Ro, you know, that is really what we're focused on. There is in the Industrial Processing segment in fiber processing, there are some meaningful projects, both North America, Europe, and Asia. If you recall, Gary, in fiber processing for those capital projects, those are largely recognized on an over time basis.

Speaker 5

Once we get the orders in.

Speaker 5

We will start to recognize revenue. We really, really need to see those in the back half. Unlike wood processing, where I made a note in my call that, you know, those orders that we got in the second quarter in wood processing, that will be revenue in 2026, because that is going to be a point in time essentially when it ships versus overtime for.

Speaker 5

The fiber processing, I guess.

Speaker 5

Okay, that's helpful. Just kind of thinking out loud here, because you're getting more capital equipment into the mix, would you expect to see that percentage of aftermarket parts as a percentage of revenue jump down sequentially?

Speaker 5

Yes, it will moderate, and there also should be an impact on the gross margins.

Speaker 5

It will moderate gross margins also.

Speaker 5

We won't be, you know, we.

Speaker 5

Wouldn't be running 46% gross margins.

Speaker 5

I would anticipate those to.

Speaker 5

Drop down into the 44s actually.

Speaker 5

We get if the mix comes in as anticipated.

Speaker 5

Can you maybe just talk about some of the bookings that you're seeing? Is it, you know, what % of it is replacement capital? What % of it is new capital to you in terms of new business?

Operator

I would say, which is often the case, that it's always more heavily weighted towards replacement than it is new greenfields, certainly with the slowdown in Asia in particular, which is where a lot of the new greenfields over the last many years have taken place. That being said, we're still getting greenfield projects in Eastern Europe, the Middle East, and Asia, outside of China. There are conversions that are taking place where people are converting, maybe modernizing a plant and putting our technology in, replacing the competitor's technology with ours. We benefited from that a little bit last quarter. I would say the one area in the capital that is, as people have heard us say over the last many years, really for the last 10 to 12 years, that's kind of overperformed, is the engineered wood side. Engineered wood side continues to perform well.

Operator

They're just finding newer and newer opportunities for the engineered products, and that's kind of the fastest growing sector of the wood business. It happens to be one that we're very strong in. We've really benefited over the years from that. The orders we mentioned that we received this quarter, those big orders, were all on the engineered wood side. That's one that probably has some of the best growth opportunities, has and will going forward.

Operator

Okay, just one last question. In terms of all this new capital equipment, be it replacement or, you know, a new customer, is there anything inherent with the newer equipment that would cause any kind of a lessening of the need of the aftermarket business from running this equipment, in terms of the parts?

Operator

It depends a little bit on the equipment. If you think on the engineered wood side, as they put this new equipment in, almost every using our new knife design, our new knife technology, which really increases the aftermarket component of that. On some of the others, we're constantly trying to innovate our products to give the customer better performance, in some cases longer life. Now there's a kind of total cost of ownership calculation that goes in that. Generally speaking, we would not expect to see any significant drop off in the parts consumables relative to new technology while we're continually trying to improve the performance of it. These are very harsh, rugged environments that our equipment operates in, so you're not going to see a significant change in the life of that equipment, even though we constantly try to.

Operator

Thank you very much.

Speaker 3

Thank you. As a reminder to ask a question, please press Star 11 on your telephone. Again, that is Star 11 to ask a question. Our next question comes from Addie Madan with D.A. Davidson. Your line is open.

Speaker 5

Hi.

Speaker 5

Thank you, Adi. Good to be on with you today. Just a couple of questions from me. Going off the wood processing question, obviously very encouraging news on that front. Outside of wood processing, how would you characterize the underlying demand for capital equipment bookings, and how are the conversations with customers going? Are you seeing customers more confident in placing orders?

Operator

Going into this year, kind of towards the end of last year and into the beginning of this year, there were a lot of discussions and we had a lot of projects on the board. What's happened is, as we said last quarter, many of them were delayed or paused because of all the craziness associated primarily with the tariffs. The tariffs really created a tremendous amount of uncertainty globally, and a lot of people said, we're just going to sit on the sidelines here until this stuff clears up. As is always the case with these things, there's a winner and a loser. We have some customers that will be winners associated with these tariffs, particularly our U.S. customers that won't be subject to the same pricing pressures from foreign competition.

Operator

Some of our markets, some of our customers will benefit from these and others will be impacted by them. I think what's happened is that there's been essentially kind of a capital equipment recession over the last two years. The prior eight quarters, we saw a pickup this quarter, which was the beginning of the third year of that. We were pleased to see that. The equipment's getting quite old, and history tells us that they can't delay that forever. The equipment just starts to really be unreliable to them. There's a lot of project activity out there. I think they're just waiting for these uncertainties to clear up and to get a little more visibility. There's a fair amount of demand, and many of the markets we're in are forecasted to be quite robust over the next few years, 2026 and 2027 in particular.

Operator

I think people just really want to see that we put whatever these trade negotiations are, we put them behind us, and everybody says, okay, this is what I have to work with now, and we go forward under those conditions.

Operator

Okay, got it. Yeah, that makes sense. Going off that, are you seeing big pockets of strength or weakening demand across the portfolio, whether by geographic or by any customer set that you can give us any color on?

Operator

As I mentioned a few minutes ago, we continue to see strength in certain parts of our Wood Group. In particular, the Engineered Wood Group continues to perform well. If you talk to industry executives out there, they are quite optimistic about the next many years. What the engineered wood business is going to look like, they just continue to find more and more applications for it. Probably our slowest market is China. The other parts of Asia are doing a little better, but China is quite slow right now. There is a fair amount of economic challenges that they're dealing with right now there. North America is the strongest. Europe is kind of sitting in between. It will be interesting to see what happens in Europe because they've agreed to increase their deficit spending. They've agreed to increase their military spending by quite a bit.

Operator

That should spur a lot of the industrial base over there. We're in the very early stages of that, so it's too early to know what kind of impact that will have on the markets.

Operator

Got it. That makes sense. In the context of the Babini and GPS acquisitions, can you give us an update on the current full year guide assumptions versus the prior as it relates to tariff impact, FX, organic growth, and acquisition contributions to sales?

Speaker 5

Just specific to, you're talking just Babini and GPS.

Speaker 5

Yeah, yeah.

Speaker 5

Babini's revenue in 2024 was about $19 million. It's a smaller transaction in terms of size. We completed it early here in the third quarter, so I didn't bake it into the guidance. It'll have a small impact on the top line. I would anticipate out of the gate here that it'll be dilutive. We'll probably be dilutive a few cents in the third quarter, maybe also in the fourth.

Operator

This acquisition was very strategic for us in that we've incorporated their technology into our upcycling business, which is processing the waste and rejects from industrial processes, in particular on the paper side. They have probably the world's best technology for dewatering. We've had great success. We licensed it a few years ago and we've had great success with that technology. When the owner passed away and his children decided they wanted to divest of all their businesses, including Babini, it really made a lot of sense for us to bring that into the company because it's a key technology and we actually think it has broader applications. You know, they principally focus on the food side. That's where they started, but we think there are opportunities in other dewatering areas. It was a very small acquisition, but we think strategically it'll be a nice addition.

Operator

Got it. That makes sense. Last question from me. How would you characterize your margin profile in the backlog and current bookings relative to the gross margin we've seen over the last few quarters?

Speaker 5

Yeah, Eddie, I think what's most important there is.

Speaker 5

In the first two quarters.

Speaker 5

We had very strong parts and consumables mix, which helped drive the gross margin to 46% in the back half of the year. We're expecting the mix to moderate, and I would say the parts and consumables will probably be, say, mid-60s, 66, 67.

Speaker 5

We'll have more capital in the.

Speaker 5

Back half of the year, and that will weigh on the gross margins. As I was mentioning to Gary, I'd say I'm looking at kind of.

Speaker 5

In the 44% in the back half of the year, our margins with the capital mix we're anticipating.

Speaker 5

Awesome. Thank you for your time and good luck here in the back half.

Operator

Thank you.

Speaker 3

Thank you. Our next question comes from Ross Sparenblack with William Blair. Your line is open.

Speaker 3

All right, gentlemen, just a couple of follow-ups. If we have a second here, you kind of ran through some of the parts on tariffs. Can you just help us think about that in the framework of your prior guidance for around $0.35 as of the first quarter?

Speaker 5

Yeah, it's, you know, Ross, we really, amazingly, frankly, from the standpoint of when we're doing that guidance, the guidance is essentially, it's the same. We're looking at kind of that 5.

Speaker 5

To $6 million, $0.32 to $0.39.

Speaker 5

We're really, frankly, I was quite amazed when we rolled it up that the folks did such a good job at pegging where to land.

Speaker 5

Okay.

Speaker 5

That's just aluminum offsetting lower China rates, presumably lower China rates.

Speaker 5

Yeah.

Operator

I mean, the rates have come down a little bit in China, but you've got, obviously, now you heard we're talking about 15% up for all of Europe. We had the steel tariffs double, and we've had puts and takes here, but unfortunately, when you add it all up, it hasn't changed much.

Speaker 5

Okay.

Speaker 5

SG&A looks like it's taken a little ahead of the informal guidance for 2025. I know we have M&A.

Speaker 5

Coming in there, too.

Speaker 5

Can you maybe just give us a sense of where that should shake out? Is that closer to 28% of sales now?

Speaker 5

I think in the guidance range I gave, I said that we'll come in at $27.8 million to $28.3 million. Yeah, 28% is probably a good marker there, Ross.

Speaker 5

Perfect.

Speaker 5

Do you have any sense on the TNC mix of the acquisitions?

Speaker 5

Sorry, what was that? What?

Speaker 5

The parts and singles mix. I mean, last year you guys had some pretty phenomenal deals that were highly accretive. It seems like that's been.

Speaker 5

This one is really going to be more towards the capital side. Of course, now that we have it, we'll work hard to build that parts and consumables business.

Speaker 5

Absolutely. All right, thanks guys.

Speaker 3

Thank you. Our next question comes from Walter Liptec with Seaport Research. Your line is open.

Operator

Hi.

Speaker 5

Thanks.

Speaker 5

Good morning, guys. I wanted to ask, you had a

Speaker 5

Nice report for this quarter. It was above your own guidance. I think I know that was why that happened, but I wonder if you could talk about what went well this quarter that put you above guidance.

Speaker 5

Yeah, really. The primary driver was the continued strength in the parts and consumable business. It actually beat our forecast. The top line beat was driven.

Speaker 5

By parts and consumables.

Speaker 5

That drove a strong mix towards parts and consumables, which drove a strong gross margin performance. At the end of the day, that was really what drove that EPS.

Speaker 5

Okay, was it a market related thing, or is this your people out there to go get more parts and sales market share? What do you attribute it to?

Operator

Yeah, I mean, as you know, that's a key focus of ours. We're, you know, every day our guys get up and their primary job is go out and chase that aftermarket. We're constantly trying to improve that. I would say also that as we said last quarter, the aftermarket is really kind of overperforming the operating rates out there relative to where you would expect them to be. We think that's the result of not making investments in equipment for the last two plus years. It's just like you drive an old automobile, you drive it two years past its useful life. You've got to put a lot more parts in to keep it running. I think it's a combination of both our guys out there working hard, trying to capture every dollar they can find and having some success in doing that.

Operator

Also, it's just that there's more to chase out there because the equipment that's running is really getting old. That's why we think there's going to be a capital buying cycle that has to. We had a good start this quarter, but we think there should be a pretty lengthened capital buying cycle. Whether it continues this year or drifts into next year, they're going to have to start making investments because they haven't.

Speaker 5

For a few years now. Okay, got it.

Speaker 5

Okay. That makes sense when you're thinking about the third quarter and that parts mix coming down from where it was this quarter. I think that makes sense just because of the, you know, maybe more capital projects, shipping. Did you factor in, in the third quarter, like deceleration in parts sales?

Speaker 5

It's very modest, Walt. I'd attribute it to summer.

Speaker 5

Summer.

Operator

Summer. People take vacations, they don't buy it.

Speaker 5

It's very modest, particularly in Europe.

Operator

In Europe, they take those extended summer vacations, so there's nobody there to place orders.

Operator

Okay, good.

Operator

Okay.

Operator

I appreciate it.

Operator

Thank you.

Speaker 3

Thank you. As a reminder, to ask a question, please press star 11 again. That is star 11 to ask a question. Our next question comes from Addie Madan with D.A. Davidson. Your line is open.

Speaker 3

Hey, just wanted to follow up on the contributions you're expecting from the GPS acquisition as well for 2025. Like, you broke out for Babini. Any color on that?

Operator

Yeah. So really, when we say Babini, you know that we're kind of talking about both of those. GPS is a small manufacturer of gearboxes that they primarily supply to Babini. They do sell to the outside world, but their principal customer is supplying to Babini. When we talk about the combination of the two of them, we just call it Babini.

Operator

Got it. Thank you for that.

Speaker 3

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Jeffrey L. Powell for closing remarks.

Operator

Thank you, Daniel. Before wrapping up the call today, I just wanted to leave you, as I always do, with a few takeaways. Despite the weaker economies in certain areas of the world and the global trade uncertainties, the second quarter was strong in terms of capital order activity and relatively stable with respect to our aftermarket demand. Solid execution by our operations teams led to excellent gross margin performance, and our commercial teams were very successful in winning key projects during the quarter. We have a strong market position and expect strengthening demand as the second half of the year and project activity gains momentum. With that, we want to thank you for joining us today and we look forward to updating you next quarter.

Speaker 3

This concludes today's conference call. Thank you for participating. You may now disconnect.

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